Especially as of late – it was going “bad” with the economy and interest rates were rising. How come we see so many stocks with an “All time high”? I’m not looking for a psychological explanation, but literally: where do the coins come from to purchase?
In: Economics
So, there is a stock trading method called “shorting” or a “short sale”. You’re selling a stock you don’t have at today’s price. If the price goes down tomorrow, and you buy then, you’ve made money! If you sold at today’s high price, and buy tomorrow at tomorrow’s low price, you make money!
However, you must buy at some point to give your buyer what you sold them (aka “settle the trade”), no matter what the price is.
If the price goes up, you lose money. You’re buying at a high price for your sale at yesterday’s low price.
There’s an offensive stock trading technique where if your data (aka expensive Bloomberg terminal access) tells you a bunch of people just “shorted” a stock, you can buy a ton of the stock and drive up the price. This causes the “shorts”, aka the people hoping the price goes down, to panic and settle at the higher price so they don’t lose more money as the price goes up. As you’d expect, this launches the price even higher with all the buying activity.
This is why, when the economy is turning for the worse, the stock price goes straight up at first. At any given day, there are stock traders trying to guess what the top of the market is going to be, and taking out a large short position, in the hopes that this is the day the market crashes. Someone with a lot of cash using this offensive technique can earn a lot of money, as they buy big, and then sell back to these shorts at an inflated price.
If the shorts start winning (aka the price continually goes down), the company itself can apply this technique using “stock buybacks”. Early in the downturn before a recession is called, companies have ample cash to buy their stock back and blow up any successful short positions on their stock, causing the price to rocket back up to the original high price and then some.
This is also why “bad news is good news” before a recession. When there is bad news, there are always more traders that decide to take a short position, hence more positions to blow up, and subsequently sending the stock price much higher than normal.
Eventually this stops working when companies run low on cash, and the selling pressure from the greater population becomes too great to overcome, as they become unemployed and sell their stock to generate cash for rent and other responsibilities.
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